The monetary policy rule specified in the dynamic model of aggregate demand and aggregate supply indicates that the central bank adjusts interest rates in response to fluctuations in:
A) inflation expectations.
B) money supply and money demand.
C) inflation and output.
D) nominal and real exchange rates.

Question

Quizplus · Accepted Answer

According to the dynamic model of aggregate demand and aggregate supply, the monetary policy rule specifies that the central bank adjusts interest rates in response to fluctuations in inflation and output. This is because the central bank's main goal is to achieve price stability and full employment, which are both dependent on the level of inflation and output in the economy. Therefore, the central bank uses monetary policy tools such as adjusting interest rates to influence these variables and ultimately achieve its policy goals.

The Monetary Policy Rule Specified in the Dynamic Model of Aggregate